In Defense of Public Markets

By

Alex Eule

Aug. 10, 2018 1:43 p.m. ET

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Elon Musk and the Tesla Semi
Photo:
Veronique Dupont/Getty Images

By

Alex Eule

Aug. 10, 2018 1:43 p.m. ET

The equity markets arguably have never worked better for investors. Despite the threat of trade wars and the inevitability of higher interest rates, the S&P 500 is flirting with an all-time high. Since March 2009, it’s up 322%. Tech stocks have pushed the Nasdaq Composite up a staggering 522% over the same period.

The gains have theoretically benefited any American with a retirement account.

And yet public-company status has never been so passé. Even a rebound in initial public offerings this year hasn’t changed the fact that entrepreneurs are doing everything possible to keep their companies private, evidenced by the unicorn phenomenon.

The sharp falloff in IPOs—by 1980s and 1990s standards—means that stocks retired through mergers, bankruptcies, and other corporate maneuvers aren’t being replaced by new issues. After peaking at 7,600 in 1997, the number of publicly listed U.S. companies has fallen by more than half, to roughly 3,600, according to data from University of Florida professor Jay Ritter.

Enter Elon Musk’s surprising tweet last week, announcing that he, too, would like to leave the ranks of public ownership by taking Tesla (ticker: TSLA) private at $420 a share. His rationale came in a follow-up blog post: “As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla.”

My colleagues spent the week writing about Musk’s gambit and whether it’s even feasible to find financing for a company that’s bleeding cash. It is possible that Musk, like others, senses that stocks are nearing their peak. Going private now would capture his stock’s huge gains before a broader crash. Or maybe he knows something about Tesla’s future and anticipates near-term pain. Or maybe we could just take Musk at his word: He feels constrained by shareholders.

Tesla declined to make Musk available for comment.

I’m mostly interested in the climate that has enabled Musk’s contempt for public markets. Unicorns look red-hot and on-trend when they’re private. But their closed books limit accountability. An IPO filing—crammed with actual financial figures and risk statements—can turn the private party into a public flogging. And venture capitalists, entrepreneurs, and even stock exchanges are doing everything possible to prevent such uncomfortable public exposure.

Consider the efforts from Nasdaq’s own private-market unit, whose website states, “Offering partial liquidity as a private company is becoming mainstream, and in some cases an accepted interim or alternative to the public markets.” Or these words from Jamie Dimon, the nation’s top banker, and Warren Buffett, who have urged public companies to reform their bad habits: “In our experience, quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth, and sustainability.”

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Dimon and Buffett haven’t given up on public ownership, but their concern with short-termism encourages the idea that public markets are broken. That should be a concern—to investors, regulators, and, yes, journalists. Public companies, however flawed, remain our primary window on Corporate America, thanks to the heavy disclosure required by the Securities and Exchange Commission. Unicorns operate in obscurity. Consider how little we know about still-private Airbnb and Uber versus Marriott (MAR) and General Motors (GM).

Investors are protected by disclosures and the follow-ups by analysts and journalists. This isn’t simply an academic point. A few weeks ago, my colleague Mary Childs reported on a corollary in the bond market: In newspaper-free towns, investors have compensated for the lack of disclosure by demanding higher yields on local municipal bonds.

Investors in a private Tesla would face similar risks: Elon Musk’s exaggerated, albeit visionary, tendencies would go unchecked. Musk doesn’t like to deal with skeptics. Transparency is beneath him.

There are hurdles to being public, no doubt. Companies must hire a host of folks to mind the books and ensure compliance with securities laws. Every three months, executives face a report card in the form of quarterly earnings. Bad marks, and good marks, draw exaggerated reactions from investors. But corporate leaders are paid to focus on the big picture regardless of external distractions.

Aaron Levie, the chief executive of Box (BOX), has told me how going public instilled discipline in his young cloud-storage company and offered credibility with its customers.

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It’s hard not to see Musk’s public complaints as sour grapes from a boss whose stock has stalled. Where was the go-private effort when Tesla shares nearly doubled in the first six months of 2017?

The irony is that Musk’s public currency has given him a great deal of liberty in pursuing his electric-car ambitions, not to mention his $2.4 billion, all-stock purchase of Solar City, the installer of residential solar panels. Shareholders have actually been quite good to Tesla. Where else could Musk line up a $60 billion valuation for a company about to complete its second consecutive year of $1 billion-plus losses?

But the cost of being public is transparency and patience with skepticism. And there’s limited appetite for that these days. At Tesla, as in Washington, D.C., it’s easier to just blame the messenger.

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